QE: Imminently Unsuccessful

August 22, 2016

Dennis Gartman is editor and publisher of The Gartman Letter, and strategic advisor of the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN). He regularly contributes to AlphaBaskets and lends his institutional insight to educate advisors and investors about commodities and the forex markets, including about trading gold in different currency terms.

The US$ has risen and it has done so following comments from the Bank of Japan suggesting that it shall continue to err upon an expansionary policy while comments from various Federal Reserve Bank officials raise the chances of a near-term increase in the o/n Fed funds rather abruptly.

Mr. Kuroda said that he and the others at the Bank shall not rule out further cuts in interest rates there, which in light of the fact that rates are already in negative territory and the effect thus far of those negative rates has been materially supportive to the Yen… something that “corporate” Japan is clearly not at all in favor or…we find the comments strange indeed.

Mr. Kuroda made his comments to the Sankei newspaper and said the Bank’s negative rate policy has not reached its limits! Indeed, he said that The degree of negative rates introduced by European central banks is bigger than Japan. Technically there definitely is room for a further cut.

The Bank shocked the markets earlier this year when it set the rate on some deposits that the nation’s banks place with the BOJ to -0.1%. Since then the Yen/dollar has gone from 120 to the present level near “par” and corporate Japan has wailed and gnashed its collective teeth. The Bank had clearly hoped, and obviously believed, that the shift to negative rates would encourage banks to lend more, spurring higher spending and inflation. Instead, none of that has happened and indeed the signal sent to Mr. and Mrs. Watanabe is that they shall need to keep more cash on hand for their retirement to be drawn upon and they’ve been bringing investments home to Japan from abroad ever since.

In the same article, Mr. Kuroda said that the Bank will consider making changes to the ¥80 trillion ($798 billion) per year massive asset-purchase plan already in place; however, this won’t be done until a “comprehensive assessment of its monetary policies” is published in September when the Board meets again. These asset purchases are a key component of the Bank’s “quantitative and qualitative easing” program begun back in ‘13 aimed at pushing the official inflation rate to 2%. Thus far that plan has been imminently unsuccessful.

As for the comments from Fed spokespeople, firstly we note the comments from the Fed’s Vice Chairman, Mr. Stanley Fischer, whose “voice” is bested only by that of Chairwoman Yellen. Speaking at a conference in Aspen, Colorado over the weekend, Dr. Fischer seemed to err rather clearly in favor of higher rates and sooner. Assessing the US economy to be in rather healthy condition, Dr. Fischer said that the US was nearing the Fed’s targets on employment and inflation. He said that although the employment picture has slowed just a bit from the levels of last year, there is “more than enough” strength in the current conditions to warrant an increase in the fed funds rate. Further, concerning inflation, Dr. Fischer said that it was “within hailing distance” of the Fed’s 2% target.

Dr. Fischer, as everyone should know by now, is a permanent “voter” on the FOMC. On the other hand, Dr. John Williams, the President of the Federal Reserve Bank of San Francisco, is not a voter this year but his voice is perhaps the “loudest” of the non-voters because he was chosen for the position in San Francisco by Dr. Yellen given that he had been the head of the Bank’s Research Department during Dr. Yellen’s tenure as the same Banks President previously. His “voice” is often accepted as a surrogate for hers.

Thus, when Dr. Williams said at a conference in Anchorage, Alaska over the weekend that an increase in the o/n Fed funds rate is “definitely” upon the table for consideration the markets took note. However, let us also understand that there is a wide difference between putting a rate increase “upon the table” at the upcoming September FOMC meeting and actually moving rates higher. We are still of the opinion that the Fed shall defer any increase in the funds rate until after the turn of the year, not taking action in September; avoiding any action at all at the November meeting given its close proximity to the election and perhaps avoiding a rate increase in December simply because the Fed prefers not being “Grinch” at Christmas. The FOMC shall more readily defer action to the next slate of “voters” in the rotation in January.

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